One of the biggest issues missed during the election campaign was the sustainability of National's economic, environmental and even social policies. So what do you do if the government's not thinking long-term?

Behavioural economics is not a complete theory but it demonstrates that we are not the economic rational being usually assumed in economics theory. One of the most troubling divergences is that we make time-inconsistent decisions so our short run choices do not cohere over the longer term. Often this doesn't matter much in practice – we buy something we realise we don't really want shortly afterwards. Yet sometimes it matters a lot.

Why don't we have more great disasters when it does matter? What often seems to happen is that we look after our short term interests but expect the state to look after our long term ones. I am not saying the state always does this well, but it has far more resources than we have and – given that the long-term issues are complex – often does it better.

The danger is when we believe that the state is looking after us when it is not. One had always assumed that our buildings were robust. The Canterbury earthquakes and the leaky home disasters showed the state failing us by not regulating the building industry properly. A decade ago New Zealanders invested in finance companies in the mistaken belief they were protected from fraud and incompetence. You expect your workplace to be safe (it usually is).

We dont expect state intervention to be perfect – even if we grumble when things go wrong. Probably our not unreasonable expectation is that when things go really wrong there will be some kind of social insurance kicking in; when it does not the grumbling turns into public indignation.

Of course the government likes to assure us that they are looking after our long term interests. One of my objections to the Muldoon government of the 1970s was that it was almost as short-term as we were. Problems accumulated because they were not properly dealt with. Eventually many of them came to a head and were addressed by the Lange-Douglas Labour government – not well, but often courageously.

I have a similar worry about the current government. As with Muldoon’s, we assume that it is looking after our long-term interests. But some issues do not seem high in its thinking. Aside from the not insignificant environmental ones, there are those about our economic and social sustainability. Here are some of the most salient.

Our current fiscal policies are not viable in the long run. The big problems are population aging, rising demand for government spending in health (and culture and the environment although on a much smaller scale) and strong demands for lower taxes. The rule should be to respond early and respond incrementally. Otherwise you respond late, rapidly and at greater cost. (The smart politician, naturally, says ‘I wont be around when that happens’.)

Our overseas borrowing is also unsustainable, and it also generates unsustainability problems of excessive housing prices and an overvalued exchange rate which damages our export sector. We keep having to sell assets to overseas interests because we have not the savings to keep them.

We are also too dependent upon the Chinese market and dairy exports.

I am uncertain to what extent New Zealand’s inequality is sustainable. But there are unsustainable consequences of high poverty among children. It raises the current costs (or ineffectiveness) of our educational, health and judicial systems, but even more so in the long term with a loss of workforce productivity which makes it harder to pay for the higher costs.

The implications of the digital disruption appear huge but our law is trapped in the middle ages. I’d go far as royal commission on it.

I worry that the financial squeeze on the public sector is reducing its ability to help us think through such issues. Nor do we have a robust public debate necessary to think through the issues.

This is written in the week after the latest election.

What struck me during the campaign was how little these sustainability issues were addressed – by just about any party (your one excepted, of course). So where do we discuss them? How can you be sure that your government is taking a longer term view when it acts than you do?

Comments (12)

On the subject of psychology, economic choice, and peoples thinking I was listening to a radio show recently in which a psychologist demonstrated the Ultimatum Game by playing it with other guests on their panel and spoke about the irrationality observed in people.

It has always bugged me that peoples obvious concern for their reputation, which is a consideration extending into the future rather than restricted to the present and is not a immediately born cost is called irrational simply because ignoring it maximises the moments profit.

Chimps are said to be good at the ultimatum game, which makes them about as smart as economists. I always feel encouraged to draw the obvious correlation.

Likewise I suspect our evolved empathies that encourage civilised living and a certain degree of collected utilisation and management of common resources that this article suggests improves our circumstances are often disregarded as hsaloow emotions foolishly by people who fail to see the benefits born of eons of experience.

I thought I should respond briefly to Fentex’s raising of the Ultimatum Game. It’s discovery is usually attributed to three economists back in 1982 and there has been much development and discussion about it in the profession since.

There is a school of economists concerned with experimental economics in which people are put in controlled situations to see how they react. In 2002 Vernon Smith was awarded a‘Nobel Memorial Prize in Economic Sciences’ for his work in the area which began in 1955.

Economists have also ‘plundered’ the research findings of psychologists. Smith co-shared the prize in 2002 with Daniel Kahneman who is a psychologist, but much respected in economics.

Before giving further background I need to explain that there is a part of economics which is a science in the Popperian sense. It has a long history and Popper himself said in the 1940s economics was the only social science. (At that time he was dismissing psychology, although were he alive today I am sure he would acknowledge that there are large parts of academic psychology which are scientific in his sense.) But I am afraid there are chunks of what purport to be economics which is certainly not scientific; unfortunately they tend to rise to the top of public consciousness.

When economics was evolving in the nineteenth century, psychology was certainly not scientific. Yet economists needed a theory of economic behaviour. Like most scientists they adopted a theory which was, of course, tentative. It was the theory of a ‘rational economic man’ who seeks to maximise his welfare. And like most sciences some economists began to test the hypothesis. Hence the rise of experimental economics and behavioural economics (which is the former with the psychological insights added in).

As I said in the initial article, this research program has raised major doubts about how robust is the theory of rational economic behaviour. Leaving aside the non-scientific economists (and those who are not economists but pretend to be expert) and also those who were trained so long ago they cannot incorporate new findings into their thinking, there are perhaps two reasons why the theory remains widespread among scientific economists.

First, in many circumstances the theory of rational economic bhaviour works quite well. Scientists often use outdated theories as rough approximations. Tell me of a modern physicist who does not on occasions use the Newtonian paradigm.

Second, as much as the findings of behavioural economics are valued, they dont offer a coherent alternative theory – yet. And as physicists, say, will tell you, their history is of knowing the existing theory is wrong but not knowing a better one. Economics has just a lot more dark matter.

...raised major doubts about how robust is the theory of rational economic behaviour

I tend to think it's what people think is rational that is flawed, when our evaluating our personal experience of emotions and the empathy we draw from that with other people is treated as irrational.

It isn't irrational to invoke a model of other people built from empathy reflecting on our own subjective experience and incuding it in a total consideration of value for a transaction.

I think it's irrational to arbitrarily restrict the valuation of a transaction to the immediate period on implicit assumptions that everyone involved will never have occassion to reflect on the transaction in the future.

" I am uncertain to what extent New Zealand’s inequality is sustainable "

Just before the election about 30 people had their benefits halved or cut because they failed a drug test. This could be,part of, the start of a way of sustaining poverty, by converting the beneficiary class into an underclass. Once a beneficiary is given a certain status all privilege could be removed; health, education, superannuation, etc. The difficulty then is in policing the underclass however the templates exist in the United States, paramilitary policing and private prisons (pay as you go, execution the budget conscious option).

Joking aside, it seems the poverty in NZ is the fall out from traditional boom and bust thinking. Instead of kauri, wool or kiwi fruit, the latest crops are migrants, houses and finance. Instead of employing workers on the land or in mills and generating income we are creating shortages of work, houses and money for food.

"The Canterbury earthquakes and the leaky home disasters showed the state failing us by not regulating the building industry properly."

I wouldn't put these two examples in the same sentence at all. Leaky homes disaster certainly a direct consequence of deregulation and short term gain over long term pain, unsustainable written all over it.

But the earthquakes, I'm not so sure. Two significant multi storey building failures, one of which involved shonky corner-cutting and inadequate controls, I think is the exception rather than the rule, given a series of quakes, one or two of which had significantly greater shaking intensity than the buildings were designed for. That more didn't fall down is a success. That so many have since had to be pulled down is a consequence of designing building not to kill people in an earthquake instead of designing them to be serviceable after a quake as well, no doubt a significantly more costly proposition - have we got that balance right yet? I'm not sure we know the answer yet - I'm sure there are boffins working on that problem but I think to date that's more an unanswered research question rather than a failure of regulation. Things are certainly being built differently in Christchurch now, and the rest of the country should take heed, but that's a matter of standards and common design practices evolving and improving as knowledge improves. Risk and resilience are being thought through every day.

How about the rest of the country - is it ok that it's going to take many years to bring old buildings up to a minimum standard? Is it ok that there is more pressure on heritage buildings because of those same standards? These are the longer term questions that each community is muddling through, there are many factors to balance, and those questions and solutions are taking time.

Very different from the leaky building shambles and mines inspections, where working systems were purposefully and systematically dismantled. Boo.

Fentex: Economists, of course, have a rigorous notion of ‘rationality’ which they assumed as a reasonable approximation to how many people made economic decisions. The challenge economists – all social scientists – face is to develop a theory which may be used to characterise people’s behaviour which, while not perfect, is robust for most of our purposes. (I don’t think we shall ever do well at predicting how people fall in love.)

William Blake: There is a theory, arising from the experience of the nineteenth century, that excessive inequality will cause a revolution or uprising. I observe that Thomas Piketty is not unsympathetic, but his revolution comes from those on middle incomes – not the poor. I am cautious.

Mudfish: I am not an engineer so I must be cautious. What I observe is that as well as buildings which killed people, there were some Christchurch structures built in the last three decades which have had to be demolished because of the earthquakes. Assuming they were built to the standards of the times, were those standards robust enough (in terms of what was understood at the time)? Or, had we a more rigorous regulatory framework, would these buildings (and all the ones built since the 1980s now being retrofitted) have been built to a higher standard?

Havng been in the open with kilometer long views of roading and buildings when one of the major quakes occurred I'm impressed how much survived what I saw.

When you see the ground move as if it were the sea it is hard to credit any solid structure survives afterwards - the thought that the concrete median of multiple lane roads is flexible enough to ride a wave is entriely new having seen it do the conga.

Buildings in Chrisdtchurch experienced three signifcant quakes, the third the worst, and thousands on intermediary aftershocks. Only a few completely failed. I don't think they were built to an inadequate standard given NZ's level of wealth.

Saw an interesting paper a couple of weeks ago by a Spanish political theorist working with experimental economists at the IESA in Córdoba, a longitudinal study of the dictator game which took into consideration people's employment status. People did menial tasks together and were then asked to distribute genuine financial rewards however they pleased (which is where the dictator game comes in, of course). The unemployed tended toward an equal distribution, whereas the employed tended toward distributions based on merit (or what he called 'fairness' in the Rawlsian sense); that is, based on people's output in the preceding tasks. Also, people who went in or out of employment over the course of the studies tended to change their norms to fit that pattern. Like much of this research, not that surprising but curious nevertheless. I wanted to know if they'd done interviews too, which they had, but hadn't processed them yet, so that'll be interesting whenever it's published...

Chris: Your first post. You have to think in terms of leftish voters choosing a Labour candidate (or not) in the WTA race, and then splitting their list vote between Labour and Greens in the MMP race. So your analysis only really works when the Labour-Green list total is below the National list total, and yet the electorate voted in a Labour candidate.

I know of one ‘anomaly’. Grant Robertson won Wellington Central, but the Green list vote was higher than the Labour one. This must partly reflect a personal respect for Grant (but possibly also an incumbency effect – leftish voters go for the leftish incumbent whatever their quality).

It is interesting that Robertson, when announcing his candidature, talked openly about Labour’s relations with Greens.

Your second post. That Labour is over-centralised is a reasonable hypothesis, Chris that needs to be explored. For my tuppence-worth, economists have a predilection for decentralised systems being more sensitive to economic, social and technological change. There is less agreement among us on the degree to which a decentralised system responds better.